Indiana Supreme Court Rules That Insurers Are Not Obligated to Pay Any Defense Costs Incurred By the Insured Prior to Giving the Insurer Notice of the Claim

The Indiana Supreme Court recently announced in Dreaded v. St. Paul Guardian Ins. Co., No. 49S02-0805-CV-244 at 8 (Ind. April 28, 2009) that an insurer's duty to defend is not triggered until the insured complies with the notice provision of the insurance policy, and accordingly, the insurer has no obligation to pay costs incurred before the date the insured gives notice of the claim.

Dreaded, Inc., the insured, received notice from the Indiana Department of Environmental Management ("IDEM") in November 2004 demanding that it investigate possible soil contamination. Dreaded hired an attorney to defend it and hired an environmental consultant to investigate. The contractor's investigation resulted in multiple reports being submitted to IDEM. In August 2003, Dreaded, which was covered by several CGL policies issued by St. Paul, notified St. Paul and requested that St. Paul take up its defense in the IDEM claim and reimburse Dreaded for defense costs incurred up to that point. St. Paul agreed to defend from that point forward, but expressly reserved its rights and refused to reimburse Dreaded for defense costs incurred prior to the March 2004 notice and tender.

Dreaded sued and St. Paul defended by claiming that the notice and voluntary payment provisions in the policy precluded St. Paul's duty to defend prior to receiving notice and precluded Dreaded's claims for pre-notice expenses. Dreaded argued that the insurer must show actual prejudice before it is allowed to avoid coverage for the pre-notice costs. The Indiana Supreme Court agreed with the insurer.

The court explained that the notice and voluntary payment provision in the policies were clear and unambiguous, and therefore must be given its plain meaning. The court noted that the insurer was not seeking to completely disclaim its policy obligation on the grounds that the insured didn’t report the claim to the insurer within the time constraints in the notice provision. And the Court explained that an insurer cannot defend a claim of which it has no knowledge. Therefore, the insurer's duty to defend "simply does not arise until it receives the foundational information designated in the notice requirement," and "[u]ntil an insurer receives such enabling information, it cannot be held accountable for breaching that duty."

The court held that where the insured's failure to comply with the notice requirement is undisputed, the insured cannot successfully sue for breaching policy obligations during the time where the insurer knows nothing about the claim. Simply put, prejudice is irrelevant, and the insurers duty to defend does not arise until the insured complies with the policy's notice requirement. In such a case, the insurer is entitled to summary judgment with regard to costs incurred by the insured before the insured gives notice of the claim to the insurer.

Posted by: Michael A. Rogers

Categories: Current Developments / Legislation, Risk Management / Insurance